Flu Economy Takes Unexpected Turn

The Illness's Unusual Course
This Year Has Mixed Results
For Health-Care Companies

The surprising course of the latest flu season -- one of the most unpredictable in years -- has been a headache for companies from tissue makers to hospital owners.

In recent seasons, the flu has generally hit hard in December and peaked in February before petering out in March. But this year it followed a different pattern, getting off to a tamer start than usual and then roaring back in late February with the strongest surge in years. One reason: Vaccine planners failed to accurately predict the strains of the virus that would emerge this winter, making the flu shots most people got less effective than usual.

This has created a scramble at companies that count on Americans to sniffle and sneeze.
Kimberly-Clark
Corp.
, maker of Kleenex, blamed the cold-and-flu season's initial weakness for a 12% reduction in facial-tissue shipments in the quarter ended Dec. 31, compared with a year earlier.

In January,
Walgreen
Co.
CEO
Jeffrey Rein
told a shareholder gathering that December marked the first time in his 25-year career at the company that cough- and cold-medicine sales fell during the month. If attendees of the meeting needed to cough, he joked, they should leave the room and "go to a movie theater or on a bus" to spread their germs. "We're really hoping for a very strong flu season," Mr. Rein told the crowd, according to a transcript of his presentation.

Procter & Gamble
Co.
said on a conference call in January that quarterly sales of its Vicks cold medicine had been weak. "Unfortunately, people have not been getting sick at a rate that we would all like yet," P&G CEO
A.G. Lafley
said on the call, with a chuckle.

Of course, each year, influenza, with its chills, aches and fever, takes a serious toll, killing about 36,000 Americans and hospitalizing more than 200,000; one government study pegs lost earnings at $16.3 billion a year. For most people, the flu season means having to get through a couple of days of fever, achiness and coughing. Americans bought $4.1 billion worth of cold, flu and allergy remedies last year, according to market-research firm Mintel International.

However, the flu economy encompasses more than just the makers and sellers of cold medicines. Even car insurers can get a financial boost when more drivers get the flu, because at least some stay off the roads.

The recent flu outbreak, despite its severity, has led to mixed results for businesses. Sales of Vicks and Kleenex have increased since the weakness their makers reported for the end of 2007, spokesmen for the companies say. Walgreen reported on Wednesday that the number of prescriptions filled in March was down 0.1% from the previous year, partly because it filled fewer flu prescriptions.

The surge in flu cases that began in February probably saved HandClens, a fledgling hand sanitizer made by Woodward Laboratories Inc., of Aliso Viejo, Calif. It won a big order from
Costco Wholesale
Corp.
last year only to see crowds of healthy shoppers ignore the product in January. "We were absolutely in panic mode," says CEO
Kenneth Gerenraich.
"We were borrowing from our credit line to pay the bills and keep ourselves afloat."

As the flu flourished in February, so did sales. "Now we're paying our bills, and the checks are flowing in," Mr. Gerenraich says. "Business is good."

Hospitals also rode the roller coaster of this flu season. Sicker patients often bring higher reimbursement from insurers or the government, and the flu can cause pneumonia and other complications. "You have a strong flu season, and the ancillary business is very profitable,"
David Dill,
chief financial officer of
LifePoint Hospitals
Inc.,
explained to investors at a conference in January. If an elderly flu sufferer in intensive care needs a tracheotomy, "that turns into higher acuity business for us," he said. "Or, on the pediatric side, young kids coming into the hospital, that's a nice margin for us, as well."

LifePoint, a publicly traded chain based in Brentwood, Tenn., with 49 hospitals in 18 states, reported a 4.2% drop in year-over-year admissions in the fourth quarter of last year, which analysts and the company said was in large part because of the lack of flu cases. A LifePoint spokeswoman said admissions rose as flu cases soared in February and again in late March.

Meanwhile, at
Cross Country Healthcare
Inc.,
which provides temporary nurses to hospitals, orders in early March were up 35% from the end of January, partly because of the late flu season this year, CEO
Joseph Boshart
told investors.

There is little that companies can do to plan around the pattern of the flu outbreak, which depends largely on what strain of virus takes hold, or to blunt the economic impact of a slow flu season. When there is a surge, of course, they can work with retailers to make sure the stores are fully stocked. It is still too early to know the final impact that this odd flu season will have on the bottom lines at hospitals and other health-care companies, says Cowen & Co. health-care analyst
Kemp Dolliver
in Boston.

By February, every state in the country was reporting widespread flu outbreaks except Florida, which as an exception had been hit earlier in the season. Maine was one of the last states to see an outbreak, but it got walloped in March. One high school in the central part of the state reported in early March that 40% of its some 1,000 students were home sick, and dozens of other schools have reported absence rates of at least 15%. "This definitely is one of the worst seasons ... in my 12 years on the job," says Dora Mills, the state's public-health director.

Through the second week of March, the flu remained rampant in more than 40 states, according to the Centers for Disease Control and Prevention. It was still widespread in 17 states as of March 22 and persisted in pockets in most other states, according to the latest data available from the CDC.

A confluence of factors seem to have contributed to this year's flu season. The strains of flu that have predominated in the U.S. in recent years are known as H1N1. Health officials predicted last year that that trend would continue, so pharmaceutical companies pumped out vaccines to target those strains. But H3N2 strains proved more prevalent this year. To make matters worse, H3N2 is a particularly nasty variety of the flu.

ENLARGE

Moreover, flu season is inherently unpredictable, starting as early as October and sometimes peaking only in April. Even the right vaccine doesn't prevent outbreaks altogether, as a relatively small number of people get vaccinated. Manufacturers distributed about 115 million doses last year, so no more than about a third of Americans were vaccinated at all.

Of course, the flu season can be fickle about whom it rewards. Not long after
Wal-Mart Stores
Inc.
reported that cold-and-flu sufferers spurred January sales of over-the-counter medications, CEO Lee Scott apologized on a conference call for the sound of his voice. He had the flu.

The number of prescriptions filled in Walgreen Co. stores open at least a year fell 0.1% in March from the previous year, partly because of the slow flu season. A previous version of this article incorrectly said the decline was 1.6%.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.